PART ONE: THE CREDITOR-DEBTOR RELATIONSHIP
CHAPTER 1. CREDITORS’ REMEDIES UNDER STATE LAW
I. Assignment 1: Remedies of Unsecured Creditors under State Law
a. Unsecured Creditor. Anyone who is owed a legal obligation that can be reduced to a money judgment is a creditor of the party owing the obligation. Unless a creditor contracts w/ the debtor for secured status or is granted it by statute, the creditor will be unsecured.
b. Rights Baseline. The rights of an unsecured creditor are the baseline; that is, all creditors have the rights available to unsecured creditors. Secured creditors have additional rights (e.g., foreclosure and repossession).
c. No Self-Help Seizure. An unsecured creditor is prohibited from self-help seizure of the debtor’s property.
i. Civil Liability: Conversion. Usually, a prohibited seizure of a debtor’s property will constitute the tort of conversion. Conversion is the wrongful exercise of dominion and control over another’s property in denial of or inconsistent with his rights. Damages for conversion liability is the value of the property seized (i.e., a “forced sale”).
ii. Criminal Liability: Larceny. A creditor that wrongfully takes possession of property of the debtor may be charged with larceny, even if the value of the property taken is less than the amount owed.
d. Debt Collection Process. The creditor must sue the debtor and get a judgment. Then she must execute by getting a writ of execution. After she finds non-exempt property, she can have the sheriff levy (i.e., physically seize) the property and auction it. Money from the foreclosure sale goes to the creditor.
i. Wrongful Collection Practices. If the creditor demands payment from the debtor in an unreasonable manner, she may incur liability for wrongful collection practices.
ii. Exempt Property. Exemption statutes provide for certain property to be exempt from execution. See Wis. Stat. Ann. §§ 8.15.18, 815.20(1), 990.01(14) (West 2008) (pp. 14–16). Texas has a $60k exemption on certain personal property, an unlimited exemption on retirement income, and a 10-acre urban homestead exemption (no dollar limit).
e. Problem 1.1. J lent $1k to L, so she could buy lawn furniture. L hasn’t repaid J. The furniture is in L’s backyard and is worth less than the amount owed. Can J go over and take the lawn furniture? No; as an unsecured creditor, J cannot resort to self-help seizure of L’s furniture. If J does take the furniture, he may be liable for conversion (i.e., the value of the furniture) and possibly punitive damages. He also may be criminally liable (trespass, larceny). To recover the debt, J must employ the debt-collection process outlined above.
f. Problem 1.3. B lent $10k to K, a day care center owner. The center has not missed a payment, but B is unsure whether it will survive (and pay her). The center sold the best of its computers and exercise equipment to move to an “upscale” location, losing 1/3 of its customers, increasing employee turnover and replacing the old manager with one who scares the children. What do you advise? Has K has defaulted on the loan? Usually, the debtor is in default if he misses payments or has some property repossessed. Sometimes, the debtor is in default if the lender feels insecure b/c of certain actions. An acceleration clause would make all payments due immediately upon default. If K has defaulted, B would have to go through the process above.
g. Problem 1.4. The day care folded and B obtained a $12k judgment against K. What do you need to know to answer her question? What are the possible sources of that information? How is the day care center organized? The loan was made to K, but the day care (entity) may own the equipment. See Vitale v. Hotel California, Inc. (where sheriff seized property of landlord, not tenant-debtor). Assuming K owns the equipment, find out what non-exempt property he has by discovery. Note: ask the right questions (remember deponent w/ $10k in his pocket).
h. Problem 1.5. If K lives in Wisconsin and owns the following property, what can the sheriff seize to satisfy B’s judgment?
i. $6k car. Wis. Stat. Ann. §§ 815.18(3)(d), (g): the sheriff can sell the car and apply $1,200 of the proceeds and up to $4,800 in unused consumer goods exemptions to satisfy the judgment
ii. $35k house. Wis. Stat. Ann. §§ 815.20(1); 990.01(14): the house is fully exempt ($40k exemption)
iii. $10k day care equipment. Wis. Stat. Ann. § 815.18(3)(b): the equipment is exempt up to $7,500
iv. $2,265.92 bank account. Wis. Stat. Ann. § 815.18(3)(k): the bank account is exempt up to $1k
II. Assignment 2: Security and Foreclosure
a. Foreclosure. If a secured debt is not paid when due, the creditor can compel the application of the value of the collateral to payment of the debt. The process by which the creditor compels application is called foreclosure.
b. Scope of Article 9. If Article 9 applies to a transaction, the secured creditor must comply with Article 9. That is, she must comply with the rules regarding creation and attachment of a security interest, perfecting a security interest, and repossessing and foreclosing on secured property.
c. Transactions Intended as Security. Since Article 9 procedure is technical, time-consuming and expensive, creditors may enter into contracts that don’t create a security interest in form, but do create one in effect. But, Article 9 will apply to any transaction, regardless of its form, that creates a security interest in personal property by contract. U.C.C. § 9-109(a).
i. Conditional Sales. Owners who intend to sell goods on credit sometimes seek to retain title to the goods until the buyer has finished paying for the goods. But, “the retention or reservation of title by a seller of goods . . . is limited in effect to a reservation of a ‘security interest.’” U.C.C. § 1-201(35).
ii. Leases Intended as Security Interests. If the term of the lease extends for the entire remaining economic life of the collateral, the economic effect of the lease on the parties (taxes aside) may be identical to the economic effect of a sale with a security interest back for the purchase price. The lease will be a “true” lease if the contract transfers only part of the anticipated economic life of the property. See II.e. Problem 2.2, infra.
d. Problem 2.1. Same facts as Problem 1.5, except B and K agreed to list a car, house, equipment and bank account as security. Which items can B reach through foreclosure of her security interest?
i. Since B has a security interest in all the listed property, upon default, B has the right to repossess and foreclose on all the listed property.
ii. B’s security interest is not void as a waiver of exemptions
1. Wis. Stat. Ann. §§ 815.18(12), 815.20: exemption statute doesn’t apply to Article 9 security interests or real estate mortgages
e. Problem 2.2. Instead of selling cars (at $180.77 monthly), B plans to lease them (at $180.77/mo.) with an option to buy at the end of the lease period for $10. The lease provides that on default, B has the right to terminate the lease and the option to buy. B retains ownership of the car and will simply repossess it if the lessee defaults. What advice do you give B? Under the “intended as security doctrine,” Article 9 applies to this transaction.
i. U.C.C. § 9-109(a): Article 9 applies to a transaction, regardless of its form, that creates a security interest in personal property by contract
ii. U.C.C. § 1-201(35) : “security interest” means an interest in personal property which secures payment or performance of an obligation. Whether a transaction in the form of a lease creates a “security interest” is determined pursuant to Section 1-203
1. U.C.C. § 1-203(b)(4): a lease creates a security interest if the lease pmts are not subject to termination by the lessee and the lessee has an option to become the owner of the goods for nominal additional consideration upon compliance w/ the lease agreement
2. Here, the lessee does not have the right to terminate and has an option to buy for $10 (nominal consideration)
iii. See also, II.c.i. Conditional Sales, supra.
III. Assignment 3: Repossession of Collateral
a. Secured Party’s Right to Take Possession After Default. After default, a secured party (1) may take possession of the collateral; and (2) without removal, may render equipment unusable. U.C.C. § 9-609(a).
i. Judicial Process. A secured party may proceed under subsection (a) pursuant to judicial process. U.C.C. § 9-609(b)(1). A creditor can obtain a writ of replevin, directing the sheriff to take possession of the property from the defendant and give it to the plaintiff. The creditor completes the foreclosure by selling the collateral in a commercially reasonable manner. See U.C.C. §
n by paying the assignor (D) until, but not after, the account debtor receives a notification . . . that the amount due has been assigned and that pmt is to be made to the assignee (S/P). After receipt of the notification, the account debtor may discharge its obligation by paying the assignee (not the assignor). See U.C.C. § 9-406(a).
3. “Steps into the Shoes.” The rights of the S/P are subject to all terms of the agreement btwn the account debtor and the D and any defense or claim in recoupment arising from the transaction that gave rise to the contract. See U.C.C. § 9-404(a)(1).
f. Problem 3.1. On the facts of Problem 1.1, assume J went to an office supply store and picked up a form titled “Personal Property Security Agreement” and had L sign it. You decide it’s a perfectly enforceable security agreement designating the lawn furniture as collateral. Does your advice change? Yes; as a secured party, J may repossess the lawn furniture without breaching the peace. J should probably sneak over to L’s lawn in the middle of the night.
g. Problem 3.2. Outline some guidelines for repossession of a bulldozer. If possible, repossess the equipment (or render it unusable) without confrontation with Debtor. Repossession w/o breach of the peace is more likely at night. If Debtor is there and objects to repossession, Repossessor must withdraw. If a guard is there, Repossessor can trick/lie to him to gain entry. See III.d. Defining Breach of the Peace, supra.
i. e. As CF’s regular counsel, you should also consider whether there is anything that should be in CF’s security agreements that might make repossession easier. CF may consider having debtors agree to a security agreement like the one in Wombles (security agreement permitted creditor to “enter any premises . . . w/o liability for trespass”). See III.c.iii.3. Reasonable Standards Measuring Fulfillment of Rights and Duties, supra.
h. Problem 3.3. S (debtor) received a letter from ITT (creditor) declaring the loan in default and directing him (per the security agreement) to assemble the collateral and make it available to ITT for repossession. See III.b. Assembly of Collateral, supra. What can S do to resist repossession? What if they bring the sheriff with them? S should physically confront the repossessors and craft a situation where repossession would be a breach of the peace.
i. If ITT is repossessing by judicial process, the sheriff can take the collateral. But, if ITT brings a sheriff to assist in self-help repossession, it is a per se breach of the peace. See III.d.i. Using Police in Self-Help Repossession, supra.
ii. S should not hide the property
1. Wis. Stat. Ann. 943.25: it’s a Class E felony in WI
2. Model Rules of Prof’l Conduct R. 1.2(d): as an attorney, it would be against the Model Rules to advise S to hide the collateral
Problem 3.5. F lends an amount equal to 60% of D’s accounts receivable (A/R). When D makes a sale to the supply store, it sends a copy of the invoice to F. F deposits an amount equal to 60% of the invoice to D’s bank account. When the supply store pays the invoice, D is required to apply 60% of the proceeds to repay the loan immediately. D requested that F’s interest in the accounts not be made known to the account debtors “b/c it might make them nervous.” What are the risks of this arrangement? F runs the risk that (1) D will collect on the accounts and not pay, (2) D will make up invoices, (3) D will sell to insolvent customers, (4) D will sell defective equipment, or that (5) D